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The cost to UK universities of providing pensions for employees is poised to fall by hundreds of millions of pounds after the sector’s main retirement plan swung into surplus after more than a decade of being in deficit.
The Universities Superannuation Scheme, which serves about 500,000 university sector employees, said on Wednesday a valuation of its finances in March had recorded a £7.4bn surplus in the plan, compared with a £14.1bn deficit three years earlier.
The University and College Union, which represents university employees, said the USS valuation was “good news” for the sector and could help resolve a long-running industrial dispute over staff pay and conditions.
The swing into the black for the USS, the UK’s largest private-sector defined benefit pension plan, was driven by the sharp increase in interest rates over the past 18 months as central banks sought to curb high inflation.
The rise in interest rates have cut the cost to defined benefit pension schemes of providing pensions, because it served to reduce the value of their liabilities.
“The indicative valuation results show a major improvement in the [USS] funding position,” said Dame Kate Barker, chair of the USS board of trustees.
“This reflects some very significant economic developments since the 2020 valuation.”
According to a valuation published on Wednesday, the USS’s liabilities fell from £80.6bn in 2020 to £65.7bn in 2023, a drop of nearly 20 per cent. Over the same period, the assets increased from £66.5bn in 2020 to £73.1bn.
The turnaround in the USS’s finances has resulted in its first surplus since 2008, and opens the door to big contribution reductions for 331 university employers sponsoring the scheme, and tens of thousands of members saving into the plan.
Employers and members are currently contributing a combined 31.4 per cent of salary towards the USS, with employers picking up nearly two-thirds of this.
However, the contribution rate could fall to 20.6 per cent for both employers and members under costings prepared by the USS.
Employers are currently spending more than £2bn a year in pension costs with the USS, but this could fall by about £700mn if the contribution rate drops to 20.6 per cent.
The lower contribution rate could nevertheless still reverse a cut in USS pension benefits that was made in 2022 when the plan was in deficit.
“With a favourable financial position, we consider that a reduction in the contribution rate is likely to be appropriate at this valuation and we provided guidance to stakeholders earlier in the year to that end,” said Barker.
The USS will now consult with university employers on the trustees’ proposed funding assumptions for the 2023 valuation, with any changes to contribution rates and pension benefits to be implemented by April next year.
Universities UK, the representative group for the sector, said the valuation meant that both USS employers and members could look forward to “significantly lower” contribution levels and improved pension benefits.
Vivienne Stern, the UUK chief executive, said: “This will make a big difference to staff in this cost of living crisis and to USS employers faced with significant budget pressures.”
The UCU also welcomed the valuation and said it meant pension cuts could be restored and contributions could be reduced.
UCU general secretary Jo Grady said: “If the employer[s] . . . can now table a proper pay and conditions offer then we can bring much needed stability to our sector for the first time in nearly a decade,” she added.
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